Brickwork Independent Research As on February 23, 2011 SMALL CAP Western Shipyard Limited Key Data Business Operations: BSE Code 531217 Ltd. (WISL) is primarily engaged in providing BSE ID WESTE Issued Shares 294.64 mn ship and rig repair facilities and industrial services and caters to repair Face Value `2.00 of older vessels, which require periodical dry docking and wet repairs Market Cap. `3.15 bn (US$ 69.42 mn) at Mormugao Harbour, Goa. CMP `10.69

BSE Sensex 18,178 Incurred continuous losses since inception… 52-week High/Low 18.90/9.39 3M Avg Vol (No of Shares) 92,591 Company has been incurring continuous losses since inception in 1996 due to poor utilization of infrastructure, low volume of operations and Valuation Ratios working capital constraints. Net operating income of the company grew by mere 2.50% during the year from 62.89 Cr in FY09 to 64.46 Yr to 31 Mar FY 08 FY09 FY10 ` ` Adj.EPS (`) -3.01 -2.37 -0.01 Cr in FY10. EBIDTA increased from `7.79 Cr in FY09 to `16.82 Cr in EPS Growth (%) N.A 21.29 99.70 FY10. However, company registered net operating loss of `0.21 Cr in PER (x) N.M N.M 4.67 FY10 as against loss of `27.76 Cr in FY09. BVPS -10.92 -12.26 -0.03 PBV (x) N.M N.M N.M High Court Sanctions „Scheme of Arrangement and Dividend/Yield (%) 0.00 0.00 0.00 Compromise‟ with its secured lenders… EV (` bn) 3.81 2.58 4.67 EV/Sales (x) 10.78 4.10 7.25 Due to high accumulated losses since inception, WISL, by order of EV/EBITDA (x) N.M 33.11 27.77 court dated 15.01.2010, adopted scheme of Arrangement and Compromise with its secured creditors with ABG Shipyard Ltd. as a

Shareholding Pattern (%) confirming party and reduced its secured liabilities of `228 Cr to SEP ’10 DEC’10 Promoters 2.87 60.15 about `152 Cr. FIIs -- -- MFs 73.51 13.64 ABG Shipyard ups its stake in WISL to 60.26%… Public & Others 23.62 26.21 Post debt restructuring, ABG Shipyard Ltd. acquired 119.5 million shares from ICICI Bank in October 2010, and thereby increased its Stock Chart (Relative to SENSEX) stake in WISL from 19.69% to present 60.26%. By acquiring controlling stake, WISL is now a subsidiary company of ABG Shipyard 200.00 Ltd. 150.00 100.00

Deepak Jain Sameer Singhvi 50.00 [email protected] [email protected] 23-Feb-10 23-Aug-10 23-Feb-11 Analyst Declaration: This report is without a management meet. We, Deepak Jain & Sameer Singhvi, Western Shipyard SENSEX hereby certify that the views expressed in this report accurately reflect our personal views about the subject securities and issuers. We also certify that no part of our compensation was, is, or will be, directly or indirectly, related to the specific view expressed in this report. This report is not a buy/sell/hold recommendation on the stock.

WISL BRICKWORK

COMPANY OVERVIEW:

Background: Directors Name Designation Western India Shipyard Ltd. (WISL) was established in 1992 by setting Cdr. SK Whole Time up ship building and ship breaking facilities and ship repair facilities for Mutreja Director & CEO ocean going vessels. It signed 25 year license agreement with Mormugao Mr. RS Nakra Independent Non Executive Director Port Trust (MPT) in 1993 for about 85,000 Sq. Meters of land and

Independent Non breakwater area at Mormugao Harbor, Goa. It also signed foreign Executive Director collaboration agreement with Lisnave S.A. of Portugal for provision of Mr. T Asokraj Independent Non technical assistance and technical documentation through their Mr. Ashwani Executive Director subsidiary, Navelink S.A of Switzerland for the ship repair project at Kumar Independent Non Goa. It was registered as a ‘Ship Repair Unit’ in 1993 with Director Mr. Ashok Executive Director Chitnis General of Shipping, Ministry of Shipping and Surface Transport and government of India by virtue of which the company was entitled to the use of duty free imported and indigenous capital goods, material

handling equipment, raw materials, spares and consumables for the

project. Due to high accumulated losses since inception, WISL, by order of court dated 15.01.2010, adopted scheme of Arrangement and

Compromise with its secured creditors with ABG Shipyard Ltd. as confirming party. Later in October, 2010, by acquiring 60.26% stake,

WISL has become subsidiary company of ABG Shipyard Ltd.

WISL is headed by Cdr. SK Mutreja who has over 42 years of experience in the and in the shipbuilding, rig repair and ship repair

industry in the public and private sectors in India. The board comprises of other four independent non executive directors having diversified industry experience. “WISL is primarily engaged in providing ship and rig Business Operations: repair facilities” WISL is primarily engaged in providing ship and rig repair facilities and industrial services and caters to repair of older vessels, which require periodical dry docking and wet repairs at Mormugao Harbour, Goa. Its

services include routine maintenance and repairs, cargo hold/tank/hull

blasting and coating, main engine overhauls and tailshaft repairs, cargo gear overhaul and repairs, major conversion and modification, damage repairs, spud can repairs, steel and pipe renewal etc.

BRICKWORK INDEPENDENT RESEARCH 1 WISL BRICKWORK

It has a floating dry dock, ‘Westerner’ (of 60,000 deadweight capacity

“Company has floating dry which can accommodate ship upto 225m in length and 32.5m in breadth), dock of 60,000 Repair oil exploration rigs (upto 60m x 80m platform), 4 wet repair deadweight capacity, 4 wet jetties, portal rail cranes (of 35 ton and 50 ton capacity) and multi- repair jetties, portal rail purpose shops. As of March 31, 2010, WISL had repaired over 475 vessels cranes and multi-purpose of all types and 9 deep water oil rigs at its facilities and completed shops.” dredging of the dock pit area for taking on larger vessels.

Industry Outlook…

Ship repair industry in India is highly regulated by the Central Government through the D.G Shipping with regard to trade, operational : safety, etc. Various measures taken by the central government for “Grant of various sustained growth of ship repair industry are as under. concessions and Grant of various concessions and exemptions for developing India’s exemptions for developing ship repair capacity in view of the huge potentialities of the ship India‟s ship repair repair sector. Draft Maritime Policy of central government highlights the policy capacity.” initiatives such as dry docking policy to encourage modernization

and mechanization for repairs of most of the vessels at Indian Ports, dry docks to be given EOU (Export Oriented Units) status, 100% FDI

in ship repair and ship building, long term subsidy for constructions of all kind of vessels (20-30 years), creation of ship repair units

adjacent to the ports to repair/dry dock large vessels, etc. The policy also highlights proposed financial and fiscal initiatives “NMDP of the central such as taxation of ship building and ship repair units including government released in customs and central excise duty to be brought on par with EOU

2005 identified 228 units, ship repair and ship building to be kept out of the ambit of projects to be service tax, sales tax and VAT, investments to be made eligible for tax implemented in India‟s exemption for long period (20Years), creation of separate funding major ports over the next agency for ship building & ship repair activities, etc. 10 years involving `6110 The national Maritime Development Program (NMDP) of the central government released in 2005 identified 228 projects to be billion.” implemented in India’s major ports over the next 10 years involving `6110 billion. As per NMDP projections, total cargo traffic at the Indian ports is expected to grow at a CAGR of 13.58% up to FY12.

BRICKWORK INDEPENDENT RESEARCH 2 WISL BRICKWORK

According to the planning commission, the strength of India’s

shipping fleet will increase upto 15m GRT by the end of FY11. The ministry intends to double capacity at major and non-major ports “Shipping industry in the country to 1,590 mt by 2012 from the present 795 mt through handles 95% by volume private sector participation which will lead to higher port traffic, ship repair volumes and increased earnings for the companies in the sector. and 70% by value of India‟s International Shipping industry handles 95% by volume and 70% by value of India’s trade.” International trade. However, the shipping market is highly cyclical in

nature and is closely tied to the level of economic activity in the country. Thus, high growth rate in GDP, increase in economic activity and trade

and commerce along with measures taken by the government helps for the sustained growth and development of the ship repair industry.

Industry Competitiveness: “Shipping market is closely The five forces model helps to determine the competitive intensity and tied to the level of therefore the industry attractiveness. The existence of many players, economic activity in the highly cyclical and capital intensive nature and unpredictable cash flows country.” makes the industry less attractive. The ship repair industry framework has been analyzed on the basis of buyer and supplier bargaining power, threat of new entrants, threat of substitutes that determines the degree of rivalry

among existing players.

Supplier Power: Less Threat of New Entrants: Less •Highly regulated • Duty free import •Cyclical & Capital Intensive in • Intense global competition nature

“The existence of many players, highly cyclical and Degree Of Rivalry: High capital intensive nature • Existence of many players • Price based competition. and unpredictable cash flows makes the industry less attractive.” Buyer Power: High Threat of Substitutes: Low • Highly competitive industry •No easy substitutes •High replacement cost

BRICKWORK INDEPENDENT RESEARCH 3

WISL BRICKWORK

Incurred continuous losses since inception…

2008 2009 2010 Net Operating Income (In ` Cr) 35.37 62.89 64.46 The standard Lor EBIDTA (In ` Cr) -3.20 7.79 16.82 “During FY10, WISL PAT (In ` Cr) -35.27 -27.76 -0.21 repaired 38 vessels as Capital Structure: Tangible Networth (In ` Cr) -127.83 -143.61 -0.74 compared to 33 vessels in Borrowings (In ` Cr) 183.02 175.97 156.95 FY09.” Debt/Equity (x) N.M N.M N.M Profitability:

Operating Profit Margin -9.05% 12.39% 26.09% Net Profit Margin -99.72% -44.14% -0.33% ROCE -20.37% -6.81% 6.41% ROE 31.01% 20.45% 0.29% Coverage Ratio: Interest Coverage (x) -0.15 0.32 2.69 Liquidity Ratio:

Quick Ratio 0.44 0.43 2.11 “Net operating income of Current Ratio (x) 0.53 0.55 2.78 Source: CMIE, Brickwork Research the company grew by Company has been incurring continuous losses since inception in 1996 mere 2.50% during the due to poor utilization of infrastructure, low volume of operations and year from `62.89 Cr in working capital constraints. During the year, WISL repaired 38 vessels as FY09 to `64.46 Cr in compared to 33 vessels in FY09, of which 32 vessels are of Indian flag

FY10.” and 6 vessels are of foreign flag. The company also repaired one foreign deep water jack up oil rig of 300 meters during the year.

Net operating income of the company grew by mere 2.50% during the year from `62.89 Cr in FY09 to `64.46 Cr in FY10. EBIDTA margins

increased from `7.79 Cr in FY09 to `16.82 Cr in FY10 i.e. growth of

115.92%. However, company registered net operating loss of `0.21 Cr in FY10 as against loss of `27.76 Cr in FY09. The reduction in losses during “Company registered net the year was mainly due to reversal of interest of `51.60 Cr provided in operating loss of `0.21 Cr earlier years. Operating profit and net profit margin during the year was in FY10 as against loss of 26.09% and -0.33% as compared to 12.39% and -44.14% in FY09 `27.76 Cr in FY09.” respectively.

Due to high accumulated losses over the year, tangible Networth of the company has been negative but has improved substantially from

- `143.61 in FY09 to - `0.21 Cr in FY10 since it adopted scheme of Arrangement and Compromise with its secured creditors.

BRICKWORK INDEPENDENT RESEARCH 4 WISL BRICKWORK

The borrowings of the company during the year decreased from `175.97 Cr Value today for every `100 invested in FY09 to `156.95 Cr in FY10. Interest coverage ratio improved from Western 0.32x in FY09 to 2.69x in FY10. Current ratio and quick ratio of the Shipyard Sensex 3 Months 76.63 92.31 company during the year was 2.78x and 2.11x respectively. 6 Months 87.41 98.75 1 Year 90.36 111.62 Quarterly Performance:

3 Year 52.79 87.09 Q3 Q3 Q2 ` In Cr FY10 Growth FY11 Growth FY11 5 Year 154.48 177.45 Net Operating Revenue 19.12 59.36% 30.47 38.75% 21.96

EBIDTA 6.98 41.26% 9.86 26.90% 7.77

PBT -3.53 213.31% 4.00 117.39% 1.84 PAT -3.53 204.82% 3.70 101.09% 1.84

Source: CMIE, Brickwork Research

“During Q3FY11, net During Q3FY11, net operating income of the company increased by operating income of the 59.36% on YoY basis from `19.12 Cr in Q3FY10 to `30.47 Cr in Q3FY11. company increased by On QoQ basis, it increased by 38.75%. EBIDTA income, during Q3FY11,

59.36% on YoY basis from increased by 41.26% on YoY basis and 26.90% on QoQ basis. Net profit `19.12 Cr in Q3FY10 to margins improved significantly and grew by 204.82% and 101.09% on YoY and QoQ basis respectively. `30.47 Cr .”

Peer Analysis:

Market Cap. ROCE RONW P/E P/B (In ` Cr) (%) (%) (x) (x) Western India Shipyard Ltd. 314.97 6.41% 0.29% 4.67 N.M. Bharati Shipyard Ltd. 453.34 6.44% 16.58% 4.09 0.49 “Net profit margins Pipavav Shipyard Ltd. 5333.68 -1.93% -3.16% 549.65 3.16 improved significantly Mercator Lines Ltd. 999.68 1.36% 3.11% N.M 0.85 and grew by 204.82% Source: CMIE, Brickwork Research

and 101.09% on YoY and As compared to its peers, WISL has generated ROCE and RONW of 6.41%

QoQ basis respectively.” and 0.29% respectively and was trading at P/E multiple of 4.67x.

BRICKWORK INDEPENDENT RESEARCH 5 WISL BRICKWORK

High Court Sanctions „Scheme of Arrangement and

Compromise‟ with its secured lenders…

Due to high accumulated losses since inception, WISL, by order of court dated 15.01.2010, adopted scheme of Arrangement and Compromise

“By adopting scheme of with its secured creditors with ABG Shipyard Ltd. as a confirming party Arrangement and and reduced its secured liabilities of `228 Cr to about `152 Cr. As per

Compromise company the terms of the scheme lenders were given two options i.e. reduced its secured Restructuring option and One Time Settlement (OTS). Majority of the liabilities of `228 Cr to lenders opted for OTS. Accordingly, WISL has settled approx. `130 Cr of secured liabilities by paying `55 Cr (i.e. @42% of the outstanding about `152 Cr.” liabilities) to the lenders who opted for OTS after entering into a

borrowing arrangement with IFCI.

The major secured lender, ICICI Bank Ltd., opted for the restructuring option for its recovery of debt of approx. `98 Cr. As per the restructuring

option exercised by the bank:

42% of the debt owed to ICICI Bank Ltd has been converted into 0% interest bearing loan which will have to be converted into equity

shares as per SEBI preferential issue pricing after March, 2012.

36% of the debt owed has been converted into 177.55 million equity

shares of WISL.

22% of the debt owed has been converted into 11% interest bearing long term loan repayable in 28 quarterly installments. “ABG Shipyard Ltd. increased its stake in

ABG Shipyard ups its stake in WISL to 60.26%… WISL from 19.69% to Post debt restructuring, ABG Shipyard Ltd. acquired 119.5 million shares present 60.26%.” from ICICI Bank in October 2010, and thereby increased its stake in WISL

from 19.69% to present 60.26%. ABG Shipyard Ltd., the flagship company of ABG group is the largest private sector shipbuilder in India. By acquiring controlling stake, WISL is now a subsidiary company of ABG Shipyard Ltd which will provide the company all the technical assistance,

marketing efforts and experienced management personnel.

BRICKWORK INDEPENDENT RESEARCH 6 WISL BRICKWORK

The Road Ahead… The profitability of the company has improved with the reduction of the heavy cost of debt and by carrying out maintenance of the shipyard infrastructure and dredging. It has also taken up machine shop jobs for

Mazagon Docks Ltd. and fabrication of pontoon for the first time. It will

continue shipbuilding and other profitable activities in the near future with the technical and marketing assistance provided by ABG Shipyard Ltd. The other plans proposed by the company are:

Company proposes to aggressively enter into supply of ships spares

to its clients. Its small ship building facility is proposed to be converted into a graving dock. Once it completes its graving dock, the company will also take up shipbuilding jobs to fully utilize the ship building

facilities and workshops.

BRICKWORK INDEPENDENT RESEARCH 7 WISL BRICKWORK

Annexure: P&L and Balance Sheet

Profit & Loss Statement: ` In Cr 31.03.06 31.03.07 31.03.08 31.03.09 31.03.10 SALES 47.45 62.95 35.53 63.01 64.70 Less: Indirect Taxes 0.00 0.00 0.16 0.12 0.24 INCOME FROM OPERATIONS: 47.45 62.95 35.37 62.89 64.46 COST OF PRODUCTION: Raw material expenses 11.34 20.22 16.31 25.82 10.72 Packaging expenses 0.00 0.00 0.00 0.00 0.00 Purchase of finished goods 0.00 0.00 0.00 0.00 0.00 Power, fuel & water charges 1.45 1.49 1.42 2.18 1.67 Compensation to employees 5.21 5.57 8.05 9.20 10.35 Royalties, technical know-how fees, etc. 0.00 0.00 0.00 0.00 0.00 Lease rent & other rent 2.97 2.97 2.95 4.79 4.89 Repairs & maintenance 0.88 1.15 0.80 1.60 3.21 Insurance premium paid 0.24 0.27 0.24 0.30 0.32 Outsourced mfg. jobs (incl. job works, etc.) 11.10 9.77 5.09 13.41 8.97 TOTAL COST OF PRODUCTION: 33.19 41.44 34.86 57.30 40.13 Change in stock -4.65 -9.61 1.25 9.14 9.48 GROSS PROFIT 9.61 11.90 1.76 14.73 33.81 Selling, General & Admin. Exp. 3.18 6.89 4.96 6.94 16.99 EBIDTA 6.43 5.01 -3.20 7.79 16.82 Depreciation / Amortization 9.11 10.68 10.83 10.77 10.78 EBIT -2.68 -5.67 -14.03 -2.98 6.04 Interest paid 13.79 15.42 21.16 24.69 6.25 PROFIT BEFORE TAX, OTHER INCOME & EXTRAORDINARY ITEMS -16.47 -21.09 -35.19 -27.67 -0.21 Other Income 2.26 1.75 6.72 6.66 53.94 PROFIT BEFORE TAX & EXTRAORDINARY ITEMS -14.21 -19.34 -28.47 -21.01 53.73 Provision for direct taxes 0.07 0.08 0.08 0.09 0.00 PAT BEFORE EXTRAORDINARY ITEMS -14.28 -19.42 -28.55 -21.10 53.73 Prior period & extraordinary expenses 10.20 1.34 0.18 0.34 3.95 PAT -24.48 -20.76 -28.73 -21.44 49.78 Source: CMIE, Brickwork Research

BRICKWORK INDEPENDENT RESEARCH 8 WISL BRICKWORK

Balance Sheet:

` In Cr

31.03.06 31.03.07 31.03.08 31.03.09 31.03.10 Liabilities SHARE CAPITAL, RESERVES & SURPLUS Issued equity capital 83.82 108.54 21.71 23.42 58.93 Paid up preference capital 0.00 0.00 0.00 0.00 0.00 Reserves & surplus -187.11 -207.57 -149.04 -166.61 -59.34 Less: Expenses not written off 0.66 0.58 0.50 0.42 0.33 TOTAL NETWORTH -103.95 -99.61 -127.83 -143.61 -0.74 MINORITY INTEREST: 0.00 0.00 0.00 0.00 0.00 BORROWINGS: Secured borrowings 156.19 159.59 160.46 154.15 111.95 Unsecured borrowings 46.77 22.56 22.56 21.82 45.00 NET DEFFERED TAX LIABLITY 0.00 0.00 0.00 0.00 0.00

TOTAL LIABLITIES 99.01 82.54 55.19 32.36 156.21

Assets NET FIXED ASSETS 122.78 114.35 103.79 93.64 84.18 INTANGIBLE ASSETS 0.00 0.00 0.00 0.00 0.00 INVESTMENTS 0.05 0.05 0.05 0.05 0.05 CURRENT ASSETS, LOANS & ADVANCES (A): Cash & bank balance 1.05 3.50 4.70 0.95 4.81 Other Current Assets 42.65 52.37 50.45 73.73 107.52 Loans & advances 6.20 0.19 0.10 0.07 0.12 CURRENT LIABLITIES & PROVISIONS (B): 73.48 87.92 103.90 136.08 40.47 NET WORKING CAPITAL (A-B) -23.58 -31.86 -48.65 -61.33 71.98 TOTAL ASSETS 99.25 82.54 55.19 32.36 156.21

Contingent liabilities 27.64 30.82 28.53 49.59 53.22 Source: CMIE, Brickwork Research

BRICKWORK INDEPENDENT RESEARCH 9 WISL BRICKWORK

Contact Details: Jatin Vyas Brickwork Ratings, Phone: +91-22-28389144 Email: [email protected]

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BRICKWORK INDEPENDENT RESEARCH 10